AM War Games: Coefficients of inefficiency?
‘Size isn’t everything’ they say and yet fund selectors have long given preference to asset managers on grounds of ‘strength in depth’. It is the reciprocal and riposte of ‘star manager’ culture but it has also helped support an ever concentration of asset flows into large houses over smaller boutiques. More people, more cost. Cost is a burning issue within the active-passive debate, one of trading cost (portfolio management fees) versus residual return (active share and generation of alpha). Indeed it is the very trade-off of hiring-in more ‘skill’ to expand research resources, against increased people and associated costs, that has skewed the active-passive debate thus far.
This paper empirically examines the head count and assets under management of some of the UK’s largest asset managers, and compares their aggregated performance. This paper proposes fund selectors consider key, yet simple, due diligence questions:
- Is there an efficiency between manpower resources and aggregate performance?
- Do acquisitions, supertanker funds or passive arms impact efficiency?
- Any correlation between overall fund fees and size of portfolio teams?
- What it as an optimally sized asset team for an active fund?
- Does that number vary by asset class?
- How many unique mandates is the team stretched across?
- Does the current team contain staff arising from acquisition legacy?
- Does the house operate an autonomous multi-boutique structure?
- Is there a definable relationship between AUM and size of team?
- When does too much in-house resource become inefficient?
Let’s start with an obvious question. If adding people has a cost impact on the operational margin, then why do asset managers expand their portfolio management head count?
- Add research breadth, and coverage of asset classes, to launch more fund variants into more sectors (country funds and absolute return funds are good recent examples).
- Better technical capacity to manage increasing book of assets (‘more hands’).
- Collecting specialists to help secure specialist mandates or bring sub-advisory assets in-house.
- Depose ‘star managers’ from other firms to lure legacy assets. OMAM’s coup to attract Buxton or Artemis signing the Threadneedle US Equity team (led by Cormac Wheldon) are good examples.
- Enable technical advantage, depth of expertise, succession planning and allow cross-research between portfolio teams (E.g. Multi-asset cum-DGF funds).
- Foster reputation advantage and marketing collateral with buyers, ratings and media.
- Gain information advantage in the price discovery and management of assets.
Resources can be used in marketing to facilitate higher (differentiated) pricing. Sometimes head count expansion is a bid to protect or increase earnings revenue, sometimes in response to lagging or deteriorating performance. More often expanding resources are in response to cover increasing assets, while still maintaining credibility with fund selectors.